Starting rate for savings

richardgpesque

Hi

I have retired and currently have no pension income therefore I have transferred 10% of my personal allowance to my wife. I therefor eassumed my personal allowance was £11,313 however no code was communicated to me since I stopped working and none was listed on the HMRC website.

I decided to start drawing down some of my pension this year and took £670 in April followed by £940 in September. There was no tax free component in either of these payments.

I expected that no tax would be payable on these amounts because £940 x 12 is £11,280 and within my assumed personal allowance. This is not what happened because I actually paid £74.60 in tax.

An ew tax code had been created for me in August (I was not told of this) and this was 679. The code had been reduced because I had earned £4,515 savings interest in the year ending March 2026.

I called HMRC to update them that I expected to earn far less savings interest this tax year and my personal allowance was therefore changed to 1021.

I have since called them again to query why the starting rate for savings interest has not been applied. They said that savings interest is always prioritised and deducted from a personal allowance before any income is considered. As a consequence of this, if I draw down a pension between my current personal allowance of £10,210 and £11,313 I will be taxed on those earnings. However, if my annual pension draw down is greater than £11,313 I will then be able to earn savings interest up to a potential maximum of £6,000 per annum before any tax is payable.

To me this seems to penalise those who earn less than their personal allowance and is therefore unfair. Is this really what was intended?

Please let me know if there's an element of this that I have misunderstood.

Thank you

zagfles

This comes up here all the time. It's the way brain dead way HMRC operate PAYE, they still haven't updated the PAYE system to cope with the new way interest is taxed (well it's only been 10 years).

You do get the savings allowance, the way to stop HMRC taxing it and then having to claim it back is give them an estimate of your pension income of slightly over the tax allowance, ie £11313 in your case. You can do this in your tax account so no need to wait ages in a phone queue.

Then they should apply the full allowance to your pension income and whether you earn less or more your tax should be correct.

molerat

All interest is taxable, some is taxable at 0% though. You must use up your tax free amount before you can use those 0% bands so any interest is allocated against that first. If your other taxable income streams are correctly listed then it will make no difference to the tax collected. You need to ensure the estimated income from that pension showing in your tax account is what you intend to take in this tax year and the tax code will be changed accordingly. For completeness you may need to take a withdrawal in March so the tax is correct for the year.

richardgpesque

Thank you both for your replies, that's very helpful. I will proceed as you suggest, I want to draw down as much as I can this year in any case so that will work well for me.

richardgpesque

A final word on this.

I did escalate my concern regarding this matter with HMRC and received a call back from them today. They said that they will not consider my concern because it is about the process they follow and no errors have been made on their part (or words to that effect). They suggested that I take up the matter with my MP if I'm unhappy with their response. I can't help feeling that they couldn't care less

Isthisforreal99

https://forums.moneysavingexpert.com/discussion/comment/82146323#Comment_82146323

It all goes back to your misunderstanding of the situation which has since been explained to you.

As to the earlier 'brain dead' comment from another poster - HMRC apply the legislation as laid down by parliament so the suggestion to contact your MP is pertinent.

molerat

Your complaint essentially was that HMRC calculated your tax code in accordance with their tax manuals which are derived from statute law so not surprising that it went nowhere. They can only use what they know and there was no evidence to make them believe there was any other income. You can help yourself by getting to understand how PAYE and the coding system works because if you don't and take more payments I can guarantee you will be back here asking why tax has been deducted. Unfortunately HMRC are not going to change the whole PAYE system to satisfy what is a very small cohort of pensioners as the cost would be prohibitive and likely cause more under taxing problems than it solves over taxing - we all know the current fuss about pensioners being sent tax bills.

richardgpesque

I appreciate all the information and opinions shared.

My complaint was that the taxation progress can be regressive in cases such as mine and that does seem to be the case but I understand that this may not be much of a concern to others.

Educating yourself on how PAYE works isn't straightforward. I did try and find answers myself before posting here and couldn't find anything specific within HMRC's own guidance or elsewhere. Molerat, where can I acquire the information on the coding system as you suggest?

In case anyone is wondering, I updated my predicted drawdown income to £11,320 and my personal allowance was changed to £11,313.

Molerat, you also said that if I take more payments you could guarantee I will be back on this forum asking why I have been taxed. What do you mean by this? Surely that can't happen if I adhere to my personal allowance or savings interest limits as I always intended? I understand I will be taxed if my drawdown income exceeds my personal allowance. Is there a potential issue that I'm unaware of if my drawdown income turns out to be less than my personal allowance by end of year? I have a bit of catching up to do in the part year remaining. Or were you merely implying that I will be here again in future moaning about things that happen as a result of my own ignorance?

https://forums.moneysavingexpert.com/discussion/comment/82147039#Comment_82147039

Dazed_and_C0nfused

I think where you mainly went wrong island thinking the starter savings rate was relevant when it wasn't. You have to use all your Personal Allowance before you can benefit from that.

Now you have told HMRC you actually expect to take much more pension your tax code has been adjusted. And that would have happened even if your expected interest remained ~£4.5k.

PAYE tax deductions will depend on when you take the pension income (which tax month(s)), how much each time and if the new code was issued on a cumulative or non cumulative basis.

richardgpesque

Yes, your first point is exacty right, I can see that now.

I was out of the country at the beginning of the financial year so came to this a bit late. I intend to draw down up to my personal allownace every year between now and my 67th birthday but I don't need to hit that target within this financial year. But If I do have to catch up to that amount this year I understand that I will be taxed on any amount that is above 1/12th of my personal allowance in any given month and that any overpayment will be returned to me in the following financial year.

Many thanks for your reply

molerat

The easy way to square the tax, as long as a cumulative code is in force, is to take a withdrawal in March.